That’s why we are hopeful about the Supreme Court’s RICO decision from a few days ago. In Hemi Group, LLC v. City of New York, slip op., 559 U.S. __ (2010), Chief Justice Roberts reaffirmed that RICO has a proximate cause requirement, and that requirement has teeth. More to the point, he also rejected the argument we always hear in drug/device RICO cases – that proximate causation is satisfied by a mere showing of “foreseeability.” Typically, the plaintiffs’ RICO causation argument goes something like this: you [big bad manufacturer] lied in your marketing [i.e. wire fraud] to physicians, and of course it was reasonably foreseeable that your lies would cause the physicians to prescribe [insert offending product] to me [if it’s a consumer case]/the patient [if it is a third party payor case], causing me [the consumer/TPP] to be injured “by reason of” your fraud.
After the Court’s decision in Bridge v. Phoenix Bond & Indemnity Co., 128 S.Ct. 2131 (2008), we suspect (we know) that plaintiffs’ lawyers were feeling emboldened to bring this sort of “fraud on a third party” RICO claims. In Bridge, the Court found a sufficiently direct link between the alleged wrongful conduct and the plaintiff’s injury where the fraud was alleged to be directed not at the plaintiff, but at a governmental body(which gave the defendant a business advantage over the plaintiff).
But luckily, the Court just slammed that “third-party fraud” door shut in the Hemi case, and made clear that plaintiffs were misreading Bridge if they thought it stood for the proposition that a RICO case survives whenever the alleged fraud is directed at a third party and the resulting reliance by a third party caused the plaintiff to suffer harm, simply because that reliance was “foreseeable.”
Hemi involved a claim by the Big Apple that Hemi LLC, a New Mexico company, violated RICO by selling cigarettes online (sans NYC’s sales tax) and thus preventing the city from collecting tax it was due on sales of cigarettes to NYC residents. The City’s causation theory went like this: The Jenkins Act requires Hemi to file a report with New York State tax administrators listing the name, address, and quantity of cigarettes purchased by state residents. Hemi did not file this report, which meant the state did not have the information to pass on to the city, which meant that the city was deprived of a means to go after city residents for the cigarette taxes they owed but had not paid. Got all that? So in other words, by failing to dime out its customers to the state, Hemi was allegedly liable to the city for the taxes Hemi’s customers should have paid. Sounds like multiple levels of independent actors to us… Sort of like Steinfeld to Tinker to Evers to Chance.
And that’s exactly what the Court found. RICO requires a proximate cause showing – that the RICO injury occurred “by reason of” the RICO fraud – and that proximate cause showing in turn requires a “direct relation between the injury asserted and the injurious conduct alleged.” Slip Op. at 6 (quoting Holmes v. Securities Investor Protection Corp., 503 U.S. 258, 268 (1992) – a biggie in the RICO causation firmament of cases). The Court was (rightly) troubled by the “attenuated” causal chain alleged by the city, because there were so many steps the Court had to take to trace causation from Hemi’s action to the alleged harm. In fact, “[b]ecause the City’s theory of causation requires us to move well beyond the first step, that theory cannot meet RICO’s direct relationship requirement.” Slip Op. at 7. The city’s causal theory was further complicated by the fact that liability “rests not just on separate actions, but separate actions carried out by separate parties.” Slip Op. at 8 (emphasis in original). Sound familiar? Think "prescribing physician."
And importantly, the Court concluded that the foreseeability test of proximate causation – advocated by the dissent – has been specifically considered and rejected by the Court (in Anza v. Ideal Steel Supply Corp., 547 U.S. 451 (2006) – another RICO causation hall-of-famer). Got that, plaintiffs? In other words, your favorite argument – that RICO causation is established because the prescribing physicians’ reliance and decision to prescribe was a “foreseeable” and “intended” result of the fraud – has been rejected by the Supreme Court not once, but twice.
But what about Bridge? Well, the Court kind of gave a backhand to that case and made clear that it should not provide any solace to drug and device plaintiffs. In a nutshell:
The City’s theory in this case is anything but straightforward: Multiple steps, as we have detailed, separate the alleged fraud from the asserted injury. And in contrast to Bridge, where there were “no independent factors that account[e]d for [the plaintiff’s] injury,” here there certainly were: The City’s theory of liability rests on the independent actions of third and even fourth parties.Slip op. at 12 (our emphasis). In other words, we were right: A consumer can’t recover under RICO because of the independent actions of that pesky learned intermediary (and sometimes the insurer), and a third-party payor’s alleged harm is also remote, because it depends on the independent actions of the prescriber and the consumer.
Nothing against RICO, but we are hopeful that Hemi signals the beginning of the end for RICO claims in drug and device cases. And before the plaintiffs’ bar gets incensed about poor plaintiffs left without a remedy, remember – RICO really is, and always has been, a square hammer in this context, and there are still plenty of other (traditional) avenues for plaintiffs to seek recovery.